Is the FDIC Broke?
Feb 27, 2009
Posted by Jody Eisenman | Filed under Uncategorized
The head of the Federal Deposit Insurance Corporation, Sheila Bair, gave her quarterly report on the state of the banks today, and it wasn’t pretty. The aggregate P/L showed a net loss of $26 billion, the first overall quarterly loss in 19 years. Additionally, so called “problem banks” rose 47% to 252 from last quarter. Even more ominously, the FDIC used another $16 billion last quarter, dropping reserves to under $19 billion. Now here’s where it gets interesting. The total deposits in US banks total about $10 trillion. Bank of America, one of the so called “zombie banks” (ones that are essentially bankrupt) has $885 billion in deposits as of December 31.
Want to know what keeps Geithner up at night? If BAC were to go under, there is no way FDIC could cover their deposits. Based on today’s numbers, they have less than 3% of what BAC has on deposit. Even if one could say that some of this money is over the FDIC limit (currently $250,000), they are still ridiculously short. Clearly, the FDIC would have to get an immediate influx of emergency capital from the government. However, the problem is actually even more acute. Remember the CDS issue? While it is tough to know exactly how much CDS paper has been issued on BAC bonds, I have heard sources tell me that the number could be over a trillion. Even spread out among the usual suspect issuers (GE Capital, AIG, Citi), it would be almost impossible for these banks to pay off without massive government assistance. Therefore, the government is doing everything in their power to keep BAC (and Citi) alive. When you add up all the other problem companies that need assistance (GM, AIG, FNM , and a lot of banks), you begin to realize that Obamas’ talk about cutting the deficit is probably a fantasy.
Other than Tuesday, the market has continued its’ descent. The DJIA is down over 170 points for the week. As I predicted on Sunday, the volatility has been rather extreme, and we frequently see 50-100 point moves in minutes. Long term investing is already incredibly challenging. Even short term trading is getting difficult, as the market seems to change direction several times during the course of many trading days. Who knows what the coming days will bring?
March 5th, 2009 at 4:04 am
[...] the solvency of the Federal Deposit Insurance Corporation, better known as the FDIC (“Is The FDIC Broke?”). According to Bloomberg news, the FDIC could be insolvent this [...]
June 15th, 2009 at 2:57 pm
The Most important challenge GM faces is to win back the trust of the tax payers. Giving away billions of tax payer money is not going to go under good sights of the consumers